U.S. government shutdown still looms after Senate vote; Fed official hints at 2014 taper

SAN FRANCISCO (MarketWatch) — Gold prices closed with a more than 1% gain on Friday ahead of a weekend that could yield a decision on whether the U.S. government shuts down next week.

Comments from a Federal Reserve official that suggested a bond-buying taper could be pushed out to next year helped spur the precious metal upward, analysts said.

Gold for December delivery
US:GCZ3
rose $15.10, or 1.1%, to settle at $1,339.20 an ounce on the Comex division of the New York Mercantile Exchange. That was the highest settlement since Sept. 19 and prices finished this week 0.5% higher.

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“Gold should be supported by the double risk of the budget deadline next Tuesday and the debt-ceiling negotiations mid October,” said Mark O’Byrne, executive director at GoldCore in Dublin.

“While the debt ceiling will almost certainly be resolved before or soon after the deadline, the risk is that politicians will again kick the can down the road and not address the fundamental fiscal challenges facing the U.S.,” he said.

Democrats and Republicans have been at loggerheads over the budget, with the 2014 fiscal year starting on Oct. 1. The Senate voted Friday afternoon to approve legislation to keep the government open until Nov. 15. But the bill must now return to the House for action so a shutdown still looms. Read: Gold, oil and government shutdowns

Meanwhile, the U.S. debt ceiling is set to be breached in October. Gold surged to record intraday highs over $1,900 an ounce after the last debt-ceiling debacle in 2011.

“Gold prices were trading near unchanged levels and then spurted solidly higher following wire reports that [Evans] said the U.S. central bank may not begin to scale back its monthly bond-buying program until 2014 because the U.S. economic environment still needs to improve,” said Jim Wyckoff, senior analyst at Kitco.com.

Evans, after a speech in Norway, told reporters there was a “decent chance” the Fed would have enough confidence in a strong economy to taper at the October or December meeting. “But it also could be at the January meeting,” he added.

The ICE dollar index
DXY, +0.47%
which charts the dollar against a basket of six major currencies, showed the U.S. currency sliding south on Friday, last trading around 80.273 from 80.535 late Thursday. A weaker dollar often buoys prices for dollar-denominated commodities.

Wary of gold

Analysts said gold investors remain wary, however.

“Safe-haven interest attributable to the looming budget/debt-ceiling crisis is helping to underpin gold at this juncture,” said Peter Grant, chief market analyst at precious-metals dealer USAGOLD. “However, there is a degree of caution as we’ve seen gold come under deleveraging pressure at the front end of various crises in the past, dropping at least initially when stocks rotate lower.”

And gold is still setting up for a loss of more than 20% for the year.

David White, financial trader at SpreadEx, said in a note it’s a “potentially bearish long-term sign” that gold has struggled to hold any significant gains from the September Federal Reserve decision not to taper.

Bank of America Merrill Lynch became the latest investment bank to cut its outlook for gold, dropping its 2014 forecast by 17.2% to $1,294 an ounce.

“Gold prices have stabilized, and they could remain supported as the U.S. reaches the debt ceiling. However, we believe the focus of investors remains firmly on a gradual normalization of U.S. monetary policy. Hence, our base case anticipates sustained headwinds to gold prices,” said Daniel Lian and other Bank of America Merrill Lynch analysts in a note.

For now, silver took gold’s lead to edge higher, with the December
US:SIZ3
contract up 6.5 cents, or 0.3%, to $21.83 an ounce, for a 0.4% weekly decline.

A very strong rally for gold and silver is near, Gijsbert Groenewegen, a managing partner at Silver Arrow Capital Management, wrote in a recent blog. “ Like the Chinese, the Indians are buying more and more gold ... as a hedge against inflation and the weak economy,” he said. “Comex inventories are being depleted. Central banks want their gold repatriated (Germany, Poland, Finland).”

Economic data released Friday showed that a gauge of sentiment among consumers was at its weakest level since April. The final September reading for the University of Michigan/Thomson Reuters consumer-sentiment index fell to 77.5 from 82.1.

But consumer spending in August rose a seasonally adjusted 0.3%, marking the third-fastest increase of the year. Personal income climbed 0.4%.

On Comex Friday, January platinum
US:PLF4
rose $4.50, or 0.3%, to $1,419.20 an ounce after a nearly $18 drop on Thursday. The contract fell 1.2% from a week ago. December palladium
US:PAZ3
rose $8.35, or 1.2%, to $731.80 an ounce, up 1.4% for the week.

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